Fresh loans in China’s shadow banking system evaporated to almost nothing from
$160bn in January

A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.

The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore fell 8.3pc.

Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard.

“It seems that rising default risk has started to erode Chinese investors’ confidence,” said Wei Yao, from Societe Generale. “Together with continued regulatory tightening on banks’ off-balance-sheet activity, we are certain this slowing credit trend has further to go and will inflict real pain on the economy.”

Japan’s economy is losing steam as the monetary stimulus from “Abenomics” wears off and the country braces itself for a rise in the consumption tax from 5pc to 8pc. Economic growth slumped from 4pc in early 2013 to 0.7pc in the fourth quarter, while the country racked up a record trade deficit.

The Economy Watchers Survey saw the steepest drop last month since the March 2011 tsunami and is now lower than when Abenomics began. Marcel Thieliant, from Capital Economics, said Japan faces a “sharp slowdown”.

The renewed jitters in China come after the authorities allowed solar company Chaori to default last week, the first ever failure in the country’s domestic bond market. The episode is a litmus test of President Xi Jinping’s new regime of market discipline, though the central bank has been careful to cushion the blow by engineering a fall in interbank interest rates. “Such adjustments are necessary for China in the long run, but are nothing if not risky in the short term,” said Ms Wei.

It is extremely hard to calibrate a soft landing of this kind, and the sheer scale of China’s credit boom now makes it a global headache. China accounts for half of all the $30 trillion increase in world debt over the past five years.

Zhiwei Zhang, from Nomura, said the central bank will be forced to loosen monetary policy this year with repeated cuts in the reserve asset ratio to head off a deeper slowdown.

Nomura said China’s $23bn trade deficit in February masks capital outflows, while data was in any case distorted by the Chinese New Year.

Even so, there are signs that deflationary forces are taking hold in China. Producer prices (PPI) fell by 2pc in February from a year earlier. Haibin Zhu, from JP Morgan, said it is “disturbing” the PPI index has been negative since November, a sign that China is struggling to cope with excess manufacturing plant.

China invested $5 trillion last year, as much as the US and Europe combined. There are already signs that the country is trying to export its over-capacity overseas by pushing down the yuan. If this amounts to a competitive devaluation policy, it risks sending a fresh deflationary impulse across the globe.